Funds flow back into Turkey as growth rebounds

ISTANBUL -- The Turkish economy appears to be in better health, with real gross domestic product growing 4.3% in the January-March quarter, according to government data released Tuesday.

While a large interest rate hike in January kept domestic demand from picking up, exports grew on the back of a weaker Turkish lira, helping the country stay roughly apace with its potential growth rate, estimated somewhere in the mid-4% range. Funds have flowed backed into financial markets, lifting stocks to a one-year high.

As the U.S. Federal Reserve Board tapered its quantitative easing in late 2013 and early 2014, foreign funds fled the so-called "fragile five" emerging nations with large current-account deficits. Turkey, one of the group, saw the capital flight exacerbated by concerns over high-profile corruption scandals.

By late January, the Turkish lira had lost 24% of its value against the dollar compared with a year earlier. In response, the country's central bank raised the one-week repo rate by 5.5 percentage points late that month in hopes of stanching the outflow of funds.

The Central Bank of the Republic of Turkey's bold move, paired with a perceived decline in political risk, led the country's benchmark BIST 100 index to recover to the 80,000 range for the first time in a year as of this month.

The lira has regained just over 10% against the greenback since late January, when investors rushed to dump it. The dollar is now trading slightly below 2.1 lira. The currency was helped by the victory of Prime Minister Recep Tayyip Erdogan's incumbent AK Party in March's local elections.

Erdogan aims to buoy the economy ahead of the presidential election slated for August and is ramping up pressure on the central bank to lower rates. While the bank cut the benchmark rate by 50 basis points in May, some speculate that it may decide on another cut at its June 24 monetary policy meeting.

Turkey's real economy is being propped up by foreign demand. On the back of a softer lira, first-quarter exports climbed 11.4% on the year, whereas imports edged up just 0.8%.

According to January-April trade figures, Turkish shipments to the European Union, which account for 40% of the total, rose 13.5%, while those headed to non-EU European nations leapt 41.4%. Turkey's current-account deficit for the first three months of the year was 30% less than in the first quarter of 2013, coming in at 11.46 billion dollars.

Finance Minister Mehmet Simsek expressed confidence Tuesday that full-year growth will meet the government's 4% target. Turkey's economy expanded at the robust annualized pace of around 9% in 2010 and 2011, but slowed to 2.1% in 2012. Full-year growth for 2013 rebounded to 4%.